India central bank unfazed by rupee's record slide

Andrew Cummings
October 7, 2018

A likely intervention by the country's central bank along with expectations of some short-term measures in the upcoming monetray policy to curb currency fluctuations aided the Indian rupee to recover on Thursday from its new record low of 73.82 to a USA dollar.

"There are already forces at play that we expect will slow activity in coming quarters, including tighter financial conditions, higher oil prices and weaker global growth", said Sonal Varma, chief India economist at Nomura and one of the nine economists who had forecast rates to remain unchanged.

The rupee slipped to a fresh record low 73.76 per U.S. dollar in early trade on Thursday, after settling at a record low of 73.34 on Wednesday.

The rupee has continued its downward spiral on back of a consistent rise in crude oil price, which has already breached $85-mark for the first time in four years ahead of the USA sanctions on Iran.

The partially convertible rupee hit a life low of 73.82 per dollar before recovering to 73.62/63 by 0710 GMT. The BSE 30-share barometer tumbled 527.94 points, or 1.39 percent, to 35,447.69 in early trade with most of the sectoral indices trading in the negative zone.

SBI in its research report had said RBI should hike the repo rate by at least 25 basis points to control the value of rupee from falling. The policy rate stands at 6.5 per cent.

Mumbai-based traders said that the state-owned lenders likely stepped in on behalf of the RBI to stem the rupee's slide after the policy decision.

So far this year, the rupee has declined 13.2%, while foreign investors have sold $2.44 billion and $7.26 billion in the equity and debt markets, respectively.

The central bank will be looking out for September inflation data due on Friday, after it raised benchmark rates last week and said it was open to further tightening. Surge in the global prices of crude oil has been the major party spoiler; per barrel cost of crude has surpassed $80, making it costly for importing, thus leading heavy depreciation in the Indian currency.

On Friday, the RBI belied market expectations of a rate hike.

Rising US interest rates and bond yields have encouraged investors to pull out funds from emerging markets to pocket better returns, analysts said. A sharp rise in input costs, combined with rising pricing power, poses the risk of higher pass-through to retail prices for both goods and services, RBI said.

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